Effects of the Money Policies Applied by the Fed - Assignment Example

? Effects of the money policies applied by the Fed Introduction Fed money policy refers to economic measures undertaken by the United States Federal Reserve via the Central bank to control and regulate the amount of credit in the U.S economy (Brezina pp.8-19).Monetary policy aims at ensuring that economy has attained full employment as well as regulate the level of inflation. Fed employs the following monetary policy tools to maintain economic stability: defining a discount rate, establishing reserves requirements and open market operations (Brezina p.52). Therefore, this research will focus to investigate effects of the monetary policies applied by the Fed as discussed below under several sub-headings. What is Fed and how they work? Fed refers to the United States bank that acts as a lender of last resort to commercial banks. Fed is some times referred to as a bank of other banks. The bank manages and regulates commercial banks and other financial institutions. Fed may promote economic growth via manipulation of interest rates. Whereby, Fed may decide to either decrease or increase lending rates to stimulate the U.S economic growth. The rates may be adjusted to increase the level of inputs and employments as well as to reduce the level of inflation. Connectively, Fed may participate in an open market operation to issue or to buy treasury securities with an aim of promoting economic stability (Obringer pp.1-3). What are Fed monetary policies? How they work and how it affects the economy? A monetary policy refers to the actions taken by the Federal Reserve to influence the amount of money in the United States economy. The Federal monetary policies involve three basic tools namely; open market operation, reserve requirements and discount rates (Brezina pp. 19-20). Fed regulates the amount of money in circulation by participating in an open market operation, whereby, Fed buys and sell securities. If they buy securities, the amount of money in circulation decreases. On the contrary, if they sell securities the amount of money in circulation tends to increase. Additionally, Fed may maintain economic stability by using Federal Reserves whereby, Fed may demand financial institutions to increase their deposits to cater for the amount advanced as loans. Whereby, high reserves requirements may reduce the amount of credit rendered by commercial banks. This may consequently leads to a decrease in circulation of money (Brezina, pp.5-20). In above connection, Fed may utilize discount rates to stimulate economic growth as well as promote economic stability. Fed decides either to increase or decrease the rates of interest charged to the commercial banks. For example, if Fed increases interest rates to commercial banks, borrowers become discouraged and hence there will be less money in circulation (Brezina pp.10-25). What does Fed currently do with their monetary policies? Fed utilizes monetary policies to stabilize commodity prices; to ensure there is maximum level of employment as well as ensuring that the level of inflation has been fully minimised. For instance, Fed may decide to reduce or increase the cost of credit by making adjustments on discount rates (Tucker pp.436). Additionally, Fed may utilize reserve requirements and open market operations to stimulate U.S economic growth. Both Classical and monetarist economist asserted that monetary policies may be utilized to make adjustments on aggregate demand as well as to influence the commodities general price levels. On the contrary, monetary economist asserted that monetary policies may be utilized to make interest rates adjustment. This may consequently cause change in real GDP and investments (Tucker pp.436-437). Fed uses unconventional monetary policy? How it works and what is it? Unconventional monetary policy refers to an economic tools employed by Federal reserves in a situation where discount rates and other interest rates cannot be reduced further in order to stimulate economic growth (Glick and Leduc, paras1-4). Among unconventional policy tools include; purchasing large amount of assets with an aim of reducing interest rates. Connectively, Fed may utilize forward guidance as a tool of for lowering interest rates. Forward guidance refers to a situation where Fed makes prior communication about its future policies. Forward guidance aims to provide a direction by reducing uncertainties with regard to policies and market anticipations (Glick and Leduc, paras2-3). Normally, Fed utilizes U.S dollars exchange rates to a measure effectiveness of unconventional monetary policies. For example, during the 2008 economic down turn Fed made unconventional monetary policy announcements concerning reduction of credit rate up to zero. This further helped to boost the U.S economy by raising exports (Glick and Leduc, paras2-4). However, the effectiveness of unconventional policy announcements was significantly influenced by market participants. This is because if market participants were anticipating unconventional policy announcements no changes might occur. On the contrary, if participants were not anticipating unconventional policy announcements, then there will be a significant effect on the value of a dollar (Glick and Leduc, paras3-5).In order to determine the effects of unconventional monetary announcements on the value of U.S dollar, Fed utilized the actual monetary policy announcement dates and the quantitative measure of both forward guidance and purchases made of large assets. Whereby, Fed may make evaluations concerning what happened immediately after unconventional monetary policy announcements (Glick and Leduc, paras5-6). The impacts of unconventional monetary policy announcements to the value of U.S dollars may be taken into consideration by taking into account the weighted average of U.S value of dollars against a basket of currencies for major United States trading partners such as Europe, Canada, Japan to mention just but a few (Glick and Leduc, para5). What monetary issues are and how does Fed reacts or how do they help the economy by implementing specific policy? How does that policy work? Monetary policy issues refer to all those issues affecting economic stability, employment, interest rates as well as stability of economic prices (Nicole and Media, para1). Therefore, Federal Reserve was bestowed the responsibility of maintaining economic stability in the United States by making necessary alterations on monetary policies. Whereby, monetary policies involve economic issues such as; discount rate issues, market transactions issues and liquidity issues (Nicole and Media, para3). Discount rate issue involves the ability of Federal reserves to adjust interest rates causing a significant impact on the amount of spending and interest rates. This implies that if fed increases the rates of borrowing. Commercial banks may make the cost of borrowing among small business and individual to be substantially high. This may consequently leads to a decline in the level of spending and consumption causing an increase in the levels of unemployment (Nicole and Media, para2-3). On the contrary, Fed may reduce the cost of borrowing including as well as reserves requirements to all commercial banks. The reduction in cost of borrowing may stimulate economic growth because there will be more money to make spending as well as increase consumption. This may further causes an increase in production making companies to create more jobs to meet high demand of goods for goods and services. This may further leads to a decrease in unemployment levels (Nicole and Media, para1-4). In above connection, monetary policy involves transaction issues. Transaction issues may involve buying and selling of treasury securities and government bonds with an aim of stimulating economic growth. For instance, Fed may issue government bond and treasury securities to individual and small business. This may compromise the ability of small business to access substantial amount of loans (Nicole and Media, para2). On the other hand, Fed may buy treasury securities and bonds. This action may cause the amount of money in circulation leading to an increase in levels of economic activities such as employments. Additionally, liquidity issue involves actions taken by the Federal Reserves to increase or reduce the amount of money in circulation. Whereby, if Fed reduce reserve requirements the amount of money in circulation tend to increase. This may further encourage investments as well as high levels of jobs creation because more companies will be willing to employ more people in order to meet high economic demands for goods and services (Nicole and Media, para4). Also it is important to talk about the Fed's "quantitative easing". Fed's "quantitative easing “refers to unconventional tool utilized by Fed to increase levels of economic activities. Normally, quantitative easing aims to increase the supply of money with in order to increase economic liquidity (Brigham, Eugene, Louis and Philip pp.780-781). This tool is usually, employed by Federal Reserve when discount rates have become ineffective even after reducing them to zero. For example quantitative easing may involve buying of securities and other financial securities from commercial banks to increase money supply and stimulate economic growth. However, Fed's "quantitative easing has limitations such a: it subjects the entire economy to the problems of inflation especially in a situation where the level of easing has gone beyond a certain limit (Plumer, para4). Additionally, quantitative easing may depreciate the value of a country currency because it lowers country exchange rates relative to other countries currencies. For example, during 2008 economic crises Fed bought treasury securities and mortgages in order to promote economic stability of the United States economy. Research indicates that during this period, Federal Reserve bought an asset worth 2.1 trillion dollars to promote the U.S economic stability (Plumer, para4). Therefore, proper evaluation economic situation should be conducted to determine the level of easing that can be applied in order to remain effective and efficient (Plumer, para6) Compare current US economy with significant periods from the history (2001 Crisis, 1930's depression) and compare policies which are currently used in this economy with the policies they have used during these significant periods. Prior 1930’s the United States economy was focusing on domestic trade by concentrating at developing local industries without taking into consideration what was happening in other countries. The U.S government established trade barrier during this period as a protection mechanism for its domestic industries against foreign competition. However, the 1930’s great depression forced the United States government to change its economic policies by reducing trade barriers against other nations (U.S. Department of States, paras1-6). The economy started to employ free trade policies to try and recover from the economic shock. However despite, having adopted trade liberalisation, the U.S economy continued experiencing stiff competition from Europe, Japan, and China among other nations. Those countries acted to retaliate against U.S protection trade policies. This further heightened the magnitude of economic crisis in the United State economy as the value of dollar continued to decline (U.S. Department of States, paras2-7). This further led Bretton wood institution such as International Monetary Funds to adopt fixed exchange rate policies. Whereby, foreign currencies could be converted to U.S dollars at a rate of thirty five dollars (Econ, paras1-4). The International Monetary Funds further provided a short term credit to boast the U.S economy that was significantly affected by 1930’s great depression. The economic down town in 1930’s and 2001 were similar in the sense that both led to a significant decline in the levels of investment. However, the 2001 economic down was less severe as compared to that of 1930’s. Currently, the U.S economy employs fiscal and monetary policies to in dealing with economic problems such inflation and unemployment. Unlike the past when the U.S government used to employ fixed exchange rates and protection mechanisms policies such as tariffs and other trade barriers to protect its industries against foreign competition (Econ,paras1-4). Generally compare US economy and Fed policy with other random countries policies and economies The U.S economy generally, utilizes three basic Fed policies namely; reserve requirements, open market operations and discount rates. Other countries like Europe, china and England utilize several policies such fiscal policies, exchange rates policies and monetary policies to promote economic stability (Economics Online, paras1-4). Fiscal policies involve application of taxes and expenditure to influence the level of economic activities and achieve certain macro economics goals (Braun p.5). The United Kingdom government was reported to increase taxes in order to discourage imports and protect local industries. In addition, the government used to increase its expenditure in order to increase the levels of economic activities and create employments opportunities among its citizens. On the contrary, Exchange rate policies may involve buying and selling of foreign currencies in a foreign exchange market (Braun p.5). For instance, the bank of England tends to raise the value of its country currencies via buying pound in a foreign market (Economics Online, para1). China utilize manipulate exchange policies through devaluation and revaluation of its currencies. Whereby, devaluation of currencies may cause an increase in GDP, employments as well as aggregate demand. On the contrary, revaluation of currencies helps to reduce the level of inflation as well as aggregate demand (Economics Online, paras1-2). Conclusion Fed is the United States central bank that acts as a lender of last resort to commercial banks. Fed monetary policies include; discount rate, reserve requirements and open market operation. The three policies may be adjusted differently to promote economic stability and stimulate growth. On the other hand, Unconventional monetary policy refers to the tools employed by Federal reserves in a situation where discount rates and other interest rates cannot be reduced further to stimulate economic growth. Monetary policies issues may involve liquidity issues, discount rates and transaction issues. The above issues may have a significantly impact on credit availability and economic performance. In above connection, the study has discussed about Fed's "quantitative easing “as unconventional tool utilized by Fed to increase levels of economic activities. The current US economy has been compared with significant periods from the history (2001 Crisis, 1930’s depression). Comparisons concerning policies that are currently used in the U.S economy and those that were used in the past have been put forth. Conclusively, the U.S Fed economic policies have been compared at random with those policies employed by other countries. Works Cited Braun, Dietmar. Fiscal Policies in Federal States. Burlington, VT: Ashgate, 2003. Print. Brezina, Corona. Understanding the Federal Reserve and Monetary Policy. New York: Rosen Pub, 2012. Print. Brigham, Eugene F, Louis C. Garpenski, and Philip R. Daves. Intermediate Financial Management. Mason, OH: South-Western, 2010. Print. Econ.What are the Similarities and Differences between the 2001 Recession and Great Depression. Federal Bank of San Francisco. December 2002.Web 30 April 2013. . La?ngin, Cedric. The European Central Bank and the Federal Reserve System - a General Comparison. Mu?nchen: GRIN Verlag GmbH, 2011. Internet resource. Obringer.A.l. How Fed Works. Web 28 April 2013.HowStuffWorks, Inc. Retrieved :< http://www.howstuffworks.com/fed.htm>. Tucker, Irvin B. Macroeconomics for Today. Mason, OH: South-Western Cengage Learning, 2011. Print. Glick.L and Leduc .S. Unconventional Monetary Policy and Dollars. Federal Reserve Bank of San Francisco.1 April 2013.Web. 28 April 2013 . Nicole and Media.D.Economic Issues’ in Monetary Policy. Hearst Communications, Inc. Web 28April 2013. < http://smallbusiness.chron.com/economic-issues-monetary-policy-3866.html>. Plumer.B.What is Quantitative Easing and will it help the economy? Wonk Blog. 13 September 2012. Web 28 April 2013. . U.S. Department of States. Foreign Trade and Global Economic Impact. Unite States Economy Web.30 April 2013. . Economics Online. Policies to promote stability and Growth. Global Economic Policies.Web30 April 2013. . Read More